Opportunity in ETFs with Commodities Exposure

MarketsETF Trends

This article was originally published on ETFTrends.com.

As market swings become more prevalent and the economy experiences rising inflationary pressures, investors may consider commodities-related ETFs to diversify a portfolio.

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"Commodities, being a real asset, tend to benefit from unexpected inflation shocks. They’ve also historically been viewed as a safe haven when investors look to exit more volatile asset classes. Therefore, inflation and volatility may serve as catalysts for improving commodity prices," Dan Petersen, Director of Product Management for IndexIQ, said in a research note.

Financial advisors can also learn more about IndexIQ’s insights at the upcoming virtual conference. On March 14, 2018, ETF Trends will be hosting its annual Virtual Summit, an online virtual conference environment where financial advisors can learn about current ETF issues, hear from industry experts and connect with peers without the burden of cost and traveling.

2018 ETF Trends Virtual Summit returns Wednesday, March 14! Earn 5 CE Credit – click to register!

Looking at the commodities market, oil futures are exhibiting a favorable outlook for pricing ahead as the crude oil curve flipped into “backwardation," which typically occurs when inventories are falling or are expected to fall. This has partially been influenced by the oversupply that started in 2014, showing signs of winding back down to its long-term average, Petersen said.

Historical cyclical trends also show that it may be time for investors to favor exposure to commodities. Petersen argued that one of three situations will occur in the environment ahead: commodity spot prices rise faster than their equity counterparts, commodity spot prices fall less than equity prices fall, or commodity spot prices rise while equity prices fall.

"No matter how you slice it, if the pattern continues, it may benefit a portfolio to have exposure to commodity spot prices," Petersen said.

Furthermore, another factor to consider is the U.S. dollar. Over the last two years, emerging market currencies have appreciated against the U.S. dollar. With these commodity-buying countries on stronger financial footing due to their strengthened local currencies, it could fuel increased demand for cheaper USD-denominated raw materials, lifting commodity prices.

As investors look for ways to gain exposure to the commodities space, some may consider commodity producers or commodity stocks. For instance, something like the IQ Global Agribusiness Small Cap ETF (NYSEArca: CROP) focuses on small-cap companies in the agribusiness segment, which agricultural business that produce products like fertilizers, agricultural chemicals, farming machinery, packaged foods and meats.

2018 ETF Trends Virtual Summit returns Wednesday, March 14! Earn 5 CE Credit – click to register!

Investors interested in the global natural resources space can take a look at broad ETF options, such as the IQ Global Resources ETF (NYSEArca: GRES). Sub-sector segments include the major commodity sectors, like precious metals, industrial metals, livestock, energy, and grains, food & fiber, along with timber, water and coal.

Additionally, the IQ Global Oil Small Cap ETF (NYSEArca: IOIL) may help investors capitalize on strengthening crude oil markets and focus on potential growth opportunities in smaller companies.

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